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Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

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AN INVESTIGATION INTO IMPACT OF FOREIGN DIRECT INVESTMENT 

ON NIGERIA'S ECONOMIC GROWTH 
 

Gabriel A. Anidiobu, PhD & Chinedu C. Onyia, PhD 
Department of Banking and Finance, Faculty of Management Sciences, Enugu State University of 

Science and Technology, Agbani, Nigeria 

Corresponding Author: gabriel.anidiobu@esut.edu.ng 

DOI: https://doi.org/10.5281/zenodo.15050642 

 

Abstract: This study examined the impact of Foreign Direct Investment (FDI) and foreign 

exchange rate (FXR) on Nigeria's economic growth using 24 years of annual time series data (1999-

2022) from the World Development Indicators (WDI). Employing an ex-post facto design, the 

research analyzed effects of FDI and FXR on GDP growth rate. While stationarity was achieved for 

the variables, they were not integrated of the same order, indicating absence of a long-run 

relationship. Autoregressive Distributed Lag (ARDL) estimations were used to analyze modified 

models. Findings revealed a negative and insignificant impact of FDI on GDP growth, while FXR 

exhibited a negative but significant impact. These findings imply that FDI and FXR may not have 

contributed to economic growth due to factors such as corruption, poor infrastructure, insecurity, 

and currency devaluation. The study suggests that FDI can significantly contribute to economic 

growth in Nigeria if the government addresses infrastructure bottlenecks, fosters effective 

technology transfer and knowledge sharing, and improves the business environment for investors. 

This research, conducted in Nigeria using the ARDL model, aligns with findings from studies in 

South East Asia, Kenya, and South Africa, while contradicting studies in Tanzania and previous 

Nigerian studies. 

Keywords: FDI, Exchange Rate, Inflation rate, GDP growth rate, Autoregressive distributed lag   

   

1. Introduction 

In most developing countries, Foreign Direct Investment (FDI) serves as a means of earning foreign 

reserves via investments, businesses and foreign aids from advanced countries. FDI is considered a 

valuable source of finance and capital formation, Technology-Transfer and know-how, as well as a 

viable medium for trade among countries. Nigeria is among the major recipients of FDI in Africa. 

Primary investors are coming from China, India, Canada, United Kingdom, and Kenya to mention a 

few. Mining, Oil and Gas and primary agriculture are among the key sectors which draw most FDI. 

According to the requirement for accelerated growth in association with the Sustainable Development 

Goals is not completely clear, however, for economies to experience sustainable and inclusive 

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American Research Journal of Economics, Finance and Management 

Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

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development, cross-border trade is paramount (UNCTAD, 2019). FDI is highlighted as type of capital 

and means through which technology and knowledge can be transferred and diffused from advanced 

country to another. In other words, FDI is direct investment into production or business in a country 

by a company in another country, either by buying a company in the target country or by expanding 

operations of an existing business in that country. Foreign direct investment is done for many reasons 

including to take advantage of cheaper wages or for special investment privileges such as tax 

exemptions offered by the country as an incentive to gain tariff-free access to the markets of the 

country or the region. FDI is in contrast to portfolio investment, which is a passive investment in the 

securities of another country such as stocks and bonds. In this aspect, FDI inflows could help the 

nation's economy thrive (Mwitta, 2022). 

Theoretically, FDI has the potential to be a major driver of economic growth in Nigeria in numerous 

ways: i) brings in much-needed capital for businesses and infrastructure development, which can lead 

to creation of new jobs, expansion of existing ones, and overall economic activity; ii) transfer of 

technology and skills can benefit Nigerian businesses through knowledge sharing and training, 

leading to a more skilled workforce and increased productivity; and iii) transfer of technology and 

skills FDI can help develop export-oriented industries, bringing in foreign currency and improving 

Nigeria's trade balance. 

Nigeria's foreign investment can be traced back to the colonial era, when the colonial masters 

intended to use her resources to develop their economy, but they made very little investment. After 

the oil boom ended in 1982, Nigeria entered a maze of economic issues, including unsustainable 

balance of payments deficits, a rapidly growing debt stock, and a crippling debt service burden. 

According to Ojo and Alege (2014), the economic issues include unsustainable fiscal deficits, rising 

unemployment, and galloping inflation, but most significantly, investment collapsed, which led to a 

decline in real output and per capita real income level. 

The federal government has implemented several required measures to attract international investors 

to the country since the inauguration of democracy in 1999. Among these actions are the enactment of 

investment regulations, the repeal of rules that hinder the growth of foreign investment, and the 

president's numerous international tours for image-cleaning. Nigeria currently ranks as the first host 

economy for FDI in sub-Saharan Africa and the third in the continent (Oyegoke & Aras 2021). In 

recent years, Nigeria has implemented a number of trade policies aimed at diversifying the economy 

away from oil revenue, with a particular focus on enhancing the industrial sector, which naturally 

leads to austerity. In 2018, the total FDI inflow to the country was around USD 1.9 billion, while in 

2017, FDI inflow was around USD 3.5 billion, showing a decrease due to the consequence of the 

austerity measures imposed in 2018. At the third quarter of 2019, the FDI was only 3.37% (USD 

200.08 million) of the total capital inflow for the period. Traditionally, FDI is designed to improve the 

recipient economies thereby enhancing economic growth and development, it is in this view that 

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http://en.wikipedia.org/wiki/Tax_exemption
http://en.wikipedia.org/wiki/Tax_exemption
http://en.wikipedia.org/wiki/Portfolio_investment
http://en.wikipedia.org/wiki/Stock_(finance)
http://en.wikipedia.org/wiki/Bond_(finance)


American Research Journal of Economics, Finance and Management 

Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

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many developing countries attract foreign investors with the hope of strengthening their economy by 

increasing the foreign investment portfolio. However, most empirical analysis of the impact of FDI on 

economic growth advises otherwise, hence, a controversy. According to the existing literature, some 

empirical results found a negative relationship between FDI and economic growth, while others 

opined that as FDI increases, it results in a boost of output productivity, hence a positive relationship 

between the variables. Therefore, this study contributes to the existing literature by investigating the 

effects of FDI both on the owner, and the host country, using Nigeria as a case study. 

Many studies have examined how FDI affects the growth of different economies, and each one has 

produced a unique set of conclusions. De Mello (1999), for example, found that an increase in FDI 

increased economic growth in nations that were part of the Organization for Economic Cooperation 

and Development (OECD) using Ordinary Least Square (OLS). Similarly, Ofori & Asongu (2022) 

found that FDI increased economic growth in sub-Saharan African nations using the Generalized 

Method of Moment (GMM). However, using OLS, Wiredu et al. (2020) discovered that FDI had a 

negative impact on Ghana, Nigeria, Senegal, and Cote d'Ivoire. Some research has addressed how FDI 

affects a wide range of economic sectors, such as GDP, employment, trade, education, technology, and 

so on. 

This research is significant as it aims to enhance Nigeria's economic growth by investigating the 

crucial roles of FDI and foreign exchange rate. The findings will guide policymakers in formulating 

strategies to attract FDI, optimize foreign exchange utilization, and allocate resources effectively. 

Recognizing the dynamic and evolving nature of the relationship between FDI, foreign exchange rate 

and economic growth, this study addresses the research gap by continuously re-evaluating the impact 

in the Nigerian context, considering changes in economic policies, global conditions, and 

technological advancements. Methodologically, the research will employ time series analysis to 

understand long-term trends and patterns, while econometric models will be utilized to isolate the 

specific impact of FDI on economic growth. FDI was the primary independent variable, along with the 

foreign exchange rate (FXR), inflation rate (IFR), and trade openness (TOP) as control factors. The 

dependent variable was the GDP growth rate (GDPGR). The World Bank Indicators for years 1999–

2022 was used to create annualized time series data that extended up to 24 years in order to 

adequately examine the variables and address the time scope. As the largest economy in sub-Saharan 

Africa, Nigeria's return to civil administration in 1999 marked the beginning of stronger trade ties 

with the global economy. The lack of necessary secondary data related to our study aims till 2023 

limited this investigation inside its bounds. It must be acknowledged that the data, which came 

primarily from the World Developmental Indicators (WDI) for 24 years (1999–2022) may contain 

measurement flaws that could jeopardize the accuracy or acceptability of our study's findings. 

Furthermore, this study only focused on Nigeria; in order to produce more thorough research 

findings, future researchers may include other nations in their studies for comparison analysis. 

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Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

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2. Review of Related Literature 

UNCTAD (2016) defines FDI as an investment by entity which belongs to one country, which aim to 

undertake business investment in another country for more than a year. FDI is a crucial mechanism 

to foster economic development of the growing economies as it boosts exports and trade balance 

(Hailu, 2010). Most empirical literature reports that FDI is an important source of capital that 

complements domestic private investment, generates new employment opportunities and stimulates 

technology transfer and spillovers (Naftaly, 2024). 

Typology of FDI  

FDI is divided in two categories: horizontal and vertical. Horizontal FDI allows multinational 

companies (MNCs) like Coca-Cola, Toyota, Microsoft, to expand their production abroad such that 

producing equivalent products to domestically available ones in the FDI receiving country. Lim 

(2001) highlights that Horizontal FDI seeks to penetrate a new market; however, it may be affected by 

various factors, including openness to trade and GDP growth rate. Horizontal FDI takes a large part in 

global FDI (Campos & Kinoshita, 2003). In Vertical FDI, MNCs take advantages of geographical 

position and low costs to launch production process in receiving state and to produce for both the 

domestic and international markets. Vertical FDI is sometimes mentioned as the resource seeking 

FDI as investors tend to seek the low cost and efficient resources in the foreign country compared to 

the home country (Campos & Kinoshita, 2003). In the realm of FDI, the terms "backward FDI" and 

"forward FDI" require elucidation.  

Backward FDI involves investing in a foreign country to acquire inputs, such as raw materials, 

components, or intermediate goods, with the aim of reducing costs, increasing efficiency, or gaining 

access to new resources. This type of investment is upstream-focused and sourcing-oriented. For 

instance, a US-based automobile manufacturer investing in a Brazilian firm to source cheaper steel 

for its production would be an example of Backward FDI. On the contrary, Forward FDI entails 

investing in a foreign country to establish a presence in the local market, often to sell final products or 

services, with the goal of expanding market share, increasing sales, or establishing a local presence. 

This type of investment is downstream-focused and market-oriented. For example, a Japanese 

electronics firm investing in a Chinese subsidiary to manufacture and sell its product in the local 

market would be an instance of Forward FDI.  

FDI-Growth Nexus 

According to Carovic and Levine (2005), FDI can contribute to economic growth by transferring 

technology and knowledge, increasing capital accumulation, improving human capital and enhancing 

competition and productivity. Borensztein, et al., (1998) argue that FDI has a positive impact on 

economic growth, but only when the host country has a minimum level of human capital. This 

suggests that FDI is more effective in promoting growth when the host country has a skilled 

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Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM, 

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workforce. De Mello (1999) maintains that FDI can exert a positive impact on economic growth by 

increasing productivity and competitiveness. However, the scholar also notes the impact of FDI on 

growth depends on quality of institutions and policy direction in the host country. Likewise, Alfaro, et 

al., (2010) affirm that FDI can lead to economic growth depending on the level of FDI.  

Furthermore, Khaing (2009) argues that FDI can drive growth of a host nation targeting high growth 

sectors such as infrastructure, technology or human capital-intensive industries that can create jobs, 

stimulate innovation and boost productively. The direction of FDI, whether horizontal or vertical, also 

influences its growth contribution. Additionally, the motive behind FDI, such as market-seeking, 

efficiency-seeking or resource-seeking, affects its capability to drive growth. 

Conceptual Framework 

Independent Variables      Dependent variable  

 

 

 

 

 

 

 

 

      

Source: Author’s design (2024) 

Fig. 1:  Interaction of FDI, exchange rate and inflation rate versus Nigeria's GDP growth rate 

The following analogy shows how FDI can influence GDP growth rate, while exchange and inflation 

rates can affect the outcome. Imagine FDI as the fuel that runs a car's engine. Increased FDI can drive 

economic growth by bringing in capital, technology, and expertise, much like more fuel makes a car 

run faster. Increased output, job creation, and overall economic growth can result from this. However, 

the speed of this "car" – GDP growth rate – is not solely determined by the amount of fuel. Exchange 

rate fluctuations can significantly affect the competitiveness of a country's exports and, consequently, 

how quickly its economy grows. A favorable exchange rate can be likened to smooth, well-maintained 

highway conditions, allowing the car to travel at optimal speed. Conversely, an unfavorable exchange 

rate can be like a bumpy, congested road, hindering the car's progress. 

Additionally, inflation might be thought of as the weather. Excessive inflation can slow down the car's 

pace, much like a strong headwind. It can raise uncertainty, deter investment, and reduce purchasing 

power, all of which can negatively affect economic growth. Conversely, low and steady inflation can 

act as favourable tailwinds, possibly increasing the vehicle's speed by creating a more stable and 

predictable economic climate that encourages investment and growth. This comparison, which may 

 Foreign Direct Investment 

 Exchange Rate 

 
GD 

 GDP Growth Rate 

 Inflation Rate 

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American Research Journal of Economics, Finance and Management 

Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM, 

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not fully represent the complexities of these economic interactions, essentially illustrates how FDI is a 

key driver of economic growth but that other factors, such as inflation and exchange rate variations, 

can have a big impact on its outcome. 

Theoretical Review 

Asongu, et al. (2021) present the following overview of the main theories of FDI: 

Classical Economic Theory 

The Classical economic theory posits that FDI can significantly benefit host countries. These potential 

benefits include stimulating infrastructure development, improving payment transfers and capital 

skills, increasing foreign earnings, facilitating technology transfer, and expanding government tax 

revenue (Benetrix, et al., 2023). This theoretical framework serves as the foundation for our research. 

Dependency Theory 

Conversely, proponents of dependence theory argue that FDI can hinder economic growth. Rooted in 

Marxist principles, this theory posits that globalization, facilitated by FDI, can exploit developing 

countries through the exploitation of cheap labour, the expansion of foreign markets, the imposition 

of capitalist systems, the introduction of outdated technology, and the overexploitation of natural 

resources (Asongu et al., 2021). 

Besides, dependence theorists contend that FDI can foster collusion between local elites and foreign 

investors, leading to the exploitation of citizens. They also argue that FDI can distort domestic 

investment through the introduction of capital-intensive technologies, resulting in job losses, 

increased income inequality, and altered consumer preferences. Additionally, dependence theorists 

emphasize that FDI can drain local economies by repatriating profits to the investor's home country, 

crowding out domestic investment (Taylor & Thrift, 2013). 

Empirical Review 

This study incorporates the findings of multiple empirical investigations examining the impact of FDI 

on Nigeria's economic growth arranged chronologically from oldest to newest. Garang and Thiery 

(2018) analyzed effect of foreign direct investment, unemployment on economic growth in Uganda 

using Autoregressive Distributed Lag (ARDL) bounds approach and GDP data series obtained from 

the world bankfrom 1993 to 2015. Findings showed no sufficient statistical evidence to suggest FDI 

played significant roles in reducing unemployment and boosting economic growth. The short-run and 

long-run dynamics of the model did not point to any statistically significant relationships.  

Okolie et al. (2019) examined the impact of FDI inflows on Nigeria's economy from 1984 to 2017. The 

CBN Statistical Bulletin provided the annual time series data, which was analyzed using the vector 

autoregressive (VAR) method. The results indicated that during the military era of 1984 to 1998, 

foreign direct investment (FDI) had a positive but non-significant impact on GDP. Additionally, 

during Nigeria's eighteen years of uninterrupted democracy (1999–2017), FDI had a negative and 

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American Research Journal of Economics, Finance and Management 

Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM, 

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non-significant impact on GDP. According to the study's findings, foreign direct investment (FDI) has 

the potential to significantly impact Nigeria's growth and development. 

Trang, et al. (2019) analyzed both the short and long run impact of FDI on economic growth in 

developing countries (lower-middle) income group for the period 2000-2014 using Vector Error 

Correction Model (VECM) and Fully Modified Ols (FMOLS). Findings revealed that FDI stimulated 

growth in the long run, although it exhibited a negative impact on economic 

growth in the short run in some selected developing countries under review.  

Alabi (2019) explored impact of foreign direct investment on economic growth in Nigeria. Secondary 

source of data was employed in this study from 1986 to 2017 sourced from Central Bank of Nigeria 

Statistical Bulletin and World Development Indicator. Regression was used as estimation techniques. 

Findings of the study revealed FDI was positive and significant to economic growth of Nigeria within 

the period of study. 

Abdillahi and Mohd (2021) explored impact of foreign direct investment inflows on Ethiopia’s 

economic growth using 36 years’ time series data. Vector Auto regression (VAR) model found FDI to 

have a positive and significant effect on GDP advancement.  

Ofori and Asongu (2022) conducted a panel data estimation in sub-Saharan Africa for the period, 

1990-2020 based on a generalized method of moments (GMM) estimator. From the result, FDI was 

able to generate economic growth in both the long-run and short-run. However, the study noted most 

of the positive effect results depended on the country's governance dynamics. The study concluded 

that a country with strong institutional and governance quality would gain more from FDI inflow and 

thus grow its economy. 

Mwitta (2022) examined impact of foreign direct investment on economic growth in Tanzania 

spanning from 1990 to 2020 using Vector Error Correction Model (VECM). Results of the study 

showed a statistically significant positive association between real GDP growth rate and FDI inflow to 

GDP ratio. On the other hand, the study revealed a negative correlation between gross fixed capital 

formation to GDP ratio and real GDP growth rate which might be caused by current situation of 

public investment.  

Bashir ((2022) analyzed effect of FDI on economic growth in Nigeria for the period, 1986-2020 taking 

into cognizance effect of exchange rate in relationship between FDI and economic growth using 

annual time series data sourced from databases of World Development Indicator (WDI) of World 

Bank and Central Bank of Nigeria (CBN) Statistical Bulletin. Autoregressive Distributed Lag (ARDL) 

model was employed for analysis. Findings showed FDI had a positive and significant effect on 

economic growth. Exchange rate also had a positive and significant effect on economic growth. The 

implied growth effect of FDI was influenced by a stable exchange rate.  

Ntamwiza and Masengesho (2022) studied impact of gross capital formation on economic growth in 

Rwanda using time series data from 1990 to 2017. Error Correction Model technique for estimation 

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American Research Journal of Economics, Finance and Management 

Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM, 

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revealed a short-run and long-run positive relationship between capital formation, FDI and economic 

growth, thus confirming that gross capital formation and FDI were the main determinants of 

economic growth in Rwanda for the review period. 

Keita and Baorong (2022) examined FDI and economic growth nexus in Guinea for the period, 1990 

to 2017. The findings showed FDI in the long run positively affected economic growth in Guinea 

during the research period. 

Okello and Badj Okello (2023) using OLS method from 1970 to 2019 studied the relationship between 

FDI and economic growth in Kenya. Findings showed that association between FDI and economic 

growth was negative. The negative result was attributed to the fact that Kenya's history as an import-

substituting country and the counter effect of implemented trade policies to spur economic growth in 

Asian countries. 

Dang, et al. (2023) examined impact of FDI foreign on economic development, considering the role of 

institutional quality in 63 provinces/cities in Vietnam from 2005–2022. Applying various regression 

methods, such as Pooled OLS, the results confirmed FDI and institutional quality had a positive 

impact on economic development. Findings also proved institutional quality as a important 

determinant of FDI 

Using quarterly data from 2013 to 2022, Chi and Thi (2023) used the vector autoregression (VAR) 

model to examine the link between foreign exchange and foreign direct investment (FDI) in Vietnam. 

The findings of the study indicated a significant correlation between FDI in Vietnam and the exchange 

rate. The results also showed that Vietnam's historical values had an impact on FDI flows into the 

country. The study also discovered that the primary control variables influencing correlation between 

FDI and foreign exchange rates were trade openness and economic growth. 

Nguyen (2024) using autoregressive distributed lag (ARDL) model assessed the Influence of key 

economic globalization factors on economic growth and environmental quality in Southeast Asian 

countries. Results revealed that FDI had a negative effect on economic growth in Southeast Asia.  

Naftaly and Kipchirchir (2024) examined relationship between FDI and economic growth in Kenya 

using an Autoregressive Distributed Lag (ARDL) regression approach and causality tests. Secondary 

time series data from 1990 to 2021 were used for analysis. Findings indicated that increasing FDI 

inflow would lead to an increase in economic growth. Also, the result indicated trade openness and 

climate changed matter from a growth perspective. Notably, the results showed short-run to long-run 

FDI kindled economic growth in Kenya. 

Mazenda (2024) assessed effect of FDI on economic growth in South Africa from 1980 to 2010. 

Johansen co-integration and Vector Error Correction Modeling (VECM) estimation techniques was 

used. Variables specified in the methodology include real GDP, foreign FDI, domestic investment 

(INVE), real exchange rate (REXCH) and foreign marketable debt (DEBT). The long run results 

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showed FDI, REXCH and DEBT had a negative impact on growth. INVE had a positive impact on 

growth.  

Gap in Empirical Literature 

Building upon the literature review, several empirical studies have demonstrated both positive and 

negative relationships between FDI and economic growth based on foregoing review. This study 

addresses this mixed evidence by exploring the dynamics underlying the relationship between FDI 

and growth. 

To achieve this, the study addresses several research gaps. Firstly, it specifically focuses on the impact 

of FDI and exchange and inflation rates dynamics on economic growth (measured by GDP growth 

rate). Secondly, the study's temporal scope spans from 1999 to 2022, recognizing the significance of 

the return to civilian rule in 1999 and ensuring the analysis incorporates recent developments. 

Thirdly, the study employs specific proxies for the dependent and independent variables, utilizing 

GDP growth rate as the dependent variable and FDI as key independent variable, while incorporating 

exchange rate and inflation rate as control variables. Finally, the study contributes to the literature by 

focusing specifically on the Nigerian context, addressing a gap in existing research that primarily 

focuses on other jurisdictions.  

3. METHODOLOGY 

For this investigation, an ex-post facto design was used. Research conducted after the fact is referred 

to as ex-post facto research. This is appropriate for the assignment because it is based on an event 

that has already happened and the researcher's job is to evaluate the results and make logical 

deductions.  

Our methodology was based on the Autoregressive Distributed Lag (ARDL) estimate model used by 

Mathebula, et al. (2024), which investigated the impact of FDI on economic growth in South Africa. 

The econometric model used by the authors is described as follows: 

𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1𝐹𝐷𝐼𝑡 + 𝛽2𝑅𝐼𝑅𝑡 + 𝛽3𝐼𝑁𝐹𝑡 + 𝛽4𝑆𝑅𝑡 + 𝜀𝑡  - - - - - (1)  

where, GDP = growth domestic product (economic growth) in period t, FDI = Foreign direct 

investment in period t, RIR = Real interest rate in period t, INF - Inflation rate in period t, SR - Saving 

rate in period t. 𝛽1−𝛽4 - Coefficient parameters, 𝜀𝑡  - Error term., while t - time period. 

The prior expectations are: 𝛽1>0; 𝛽2<0; 𝛽3<0, and 𝛽4 > 0. But in order to account for our theories, 

the general ARDL model is altered as follows: 

ΔlnGDPGRt = α01 + ∑ α11∆lnGDPGRt−1
p
t=1 + ∑ α2∆lnFDIt−1

p
t=1 + ∑ α3∆lnFXRt−1

p
t=1 + ∑ α2∆lnCt−1

p
t=1 + 

β11lnYt−1+β21lnFXRt−1+β31lnCt−1+μ1t  - - - - - (2) 

Where, GDPGR𝑡 - Gross domestic product growth rate, 𝐹DI𝑡 – Foreign Direct Investment; 𝐶𝑡 – Matrix 

of control variables; 𝑡 – Time dimension; 𝜇𝑡 – Stochastic term; 𝑙𝑛 – Natural log; 𝛼0 – 

Constant term; 𝛼1 𝑎𝑛𝑑 𝛼2 – Coefficients are associated with the logarithms of FDI and control 

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184 | P a g e  

variables, respectively. The variables were transformed into logarithms to reduce the serial correlation 

problem (Gisore, 2021). 

Equation 3 was used to examine the long-term relationship, as seen below. 

lnGDPGRt = α0 + Σ α1ilnGDPGRt−i p i=1 + Σ α2ilnFDIt−i w i=0 + Σ α3ilnCt−i w i=0 + μit  - - (3) 

Table 3.1 provides the following description of the variables in our models: 

Table 3.1: Summary of model variable description 

Variable Abbreviati

on 

Measurement Data Source Expected Sign 

Dependent Variable 

Economic Growth GDPGR GDP Growth Rate World 

Development 

Indicators 

Dependent Variable 

Independent Variables 

Foreign Direct 

Investment 

FDI FDI, net inflow World 

Development 

Indicators 

Positive (Ofori & 

Asongu, 2022) 

Foreign Exchange 

Rate 

FXR Value of Naira to 

USD 

World 

Development 

Indicators 

Negative (Nyoni, et 

al., 2021)  

Control Variables 

Trade Openness TOP Total trade per 

GDP 

World 

Development. 

Indicators 

Positive (Malefane & 

Odhiambo, 2018) 

Inflation Rate  IFR Consumer Price 

Index 

World Dev. 

Indicators 

Negative 

Source: Author's compilations, 2024 

4. Data Analysis 

To determine if a time series variable is stationary or has a unit root, the Phillips-Perron (PP) unit 

root test was used. The unit root results for the sample data are shown in Table 4.1. 

Table 4.1: Summary of PP unit root test results 

Variable T-Stat. Critical Values 

@5% 

P-value Order of 

Integration 

Inference 

LnGDPGR -3.245 -2.951 0.0259 I(0) Stationary 

LnFDI -5.086 -3.548 0.0012 I(0) Stationary 

dLnFXR -7.232 -2.954 0.0000 I(1) Stationary 

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dLnTOP 

dLnIFR 

-7.153 

-12.213 

-3.553 

-3.552 

0.000 

0.0000 

I(1) 

I(1) 

Stationary 

Stationary 

Source: Author’s extract from E-views 

Table 4.1 outcomes are confirmed by the PP test which also found GDP and FDI stationary at level of 

form as revealed by the -3.245 for GDPGR and -5.086 for FDI, which are both less than their critical 

values of -2.951 and -3.548. FXR, TOP and IFR are non-stationary at level form. They, however 

become stationary after first differencing with all three variables (FXR, TOP, IFR) having a common 

p–value of 0.0000, which is below 0.05, leading to the conclusion that there is no unit root after first 

differencing. GDP and FDI, therefore, are integrated to order zero I(0), whilst FXR, TOP and IFR are 

integrated to order one I(1). This makes the ARDL method applicable to estimate the growth model 

since the variables are integrated of orders zero and one, that is, I(0) and I(1). 

ARDL model regression results Long–run estimates 

Table 4.2: ARDL model results Long–run estimates 

Variable  Coefficient  Standard Error  t-Statistic  Probability  

FDI  -0.2193  0.2584  -0.8488  0.4052  

FXR  -0.8596  0.1583  -5.4312  0.0000  

TOPN  -0.3145  0.1387  -2.2674  0.0335  

IFR  0.2503  0.3458   0.7239  0.4768  

Source: Author (compiled from E-views) 

GDPGR = -0.2193FDI - 0.8596FEXR - 0.3145TOPN + 0.2503IFR 

The effect of major independent variables (based on our specific objectives): foreign direct investment 

(FDI) and foreign exchange rate (FEXR)) on GDPGR in the long run, as reported in Table 4.2 is stated 

in the equation above.  

Decision 

Clearly, Table 4.2 shows that the coefficient for FDI has a negative (approximately, -0.22) and non- 

significant (p-value, 0.4052 > 0.05) long-run effect on GDP growth rate in Nigeria within the review 

period. Similarly, the coefficient for FEXR has a negative (approximately, -0.86), but significant 

(approximately 0000 < 0.05) long-run impact on GDP growth rate in Nigeria over the period of 

study. 

Short–run estimates  

Table 4.3: Short–run estimates 

 CointEq (-1) D(FDI)  D(FXR)  D(TOP)  D(IFR)  

Coefficient -0.7782  - 0.0128  0.505531  -0.3174  

P-value 0.0000  - 0.8834  0.0095   0.0003  

Source: Author (compiled from E-views) 

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The cointEq (-1) coefficient is an error correction component that displays the rate at which 

equilibrium in the growth model is regained. In other words, it represents the rate at which a previous 

period's disequilibrium is resolved. A negative coefficient indicates convergence, whereas a positive 

coefficient indicates divergence; thus, the cointEq (-1) is said to be significant when its value is 

negative and less than one, and its probability value is less than the chosen 5% significance level 

(Nkoro & Uko, 2016). Table 4.3 results show a large cointEq (-1) value of -0.7782, indicating that the 

speed of adjustment is around 77.8 percent. This means that anytime there is a disturbance in the 

model, the adjustment from the short run deviation to the long run equilibrium happens quickly.  

FXR and TOP were seen to be favourably associated to short-term growth, whereas IFR was 

discovered to be negatively related to short-term GDPGR and FDI and FXR were discovered to be 

unimportant in explaining short-term growth. According to the study, only IFR and TOP have a 

substantial impact on growth in the short run. 

Discussion of Findings 

Discussions arising from the foregoing empirical results are summarized in line with our study 

objectives as follows: 

Based on ARDL model results presented in Table 4.3 shows that the coefficient for FDI has a negative 

(approximately, -0.22) and non-significant (p-value, 0.4052 > 0.05) long-run effect on GDP growth 

rate in Nigeria within the review period. As a result of the findings, a 1% increase in FDI resulted in 

approximately a 22 percent decrease in GDP. In the long run. The negative relationship between FDI 

and GDP contradicted the Modernization Theory, which states that an increase in FDI should 

eventually lead to an increase in GDP, indicating a positive link between the two macroeconomic 

variables. These findings, however, support the Dependency Theory, which holds that foreign direct 

investment has a detrimental impact on the host country's economic growth. 

Nguyen (2024) support the Dependency Theory and empirically discovered that FDI had a negative 

impact on South East Asian's economic growth if multinational corporations return large profits to 

their parent countries. Okello and Badj (2023) discovered in a similar study that FDI had a negative 

influence on economic growth in Kenya applying OLS to examine the datasets for the period, 1970 to 

2019 Furthermore, Mazenda (2024) also affirmed our findings that FDI had a negative effect on 

economic growth in South Africa using VECM estimation to analyze data from 1980 to 2010. 

In Nigeria, factors such as corruption, weak institutions, poor or decaying infrastructures, 

inconsistencies in government policies, as well as security concerns may have contributed to a 

negative association between FDI and economic growth. This is contrary to our prior expectation of a 

positive relationship between FDI and economic growth, indicating that this relationship is 

bidirectional because other studies support the hypothesis that there is a positive relationship 

between FDI and economic growth. For instance, the study of Mwitta (2022) who used VECM to 

analyze datasets from 1990 to 2020 confirmed that there was a positive relationship between FDI and 

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economic growth in Tanzania. Similarly, Trang, et al., (2029) applying VECM to analyze datasets for 

the period, 2000 to 2014 affirmed that FDI had a positive and significant effect on economic growth 

in lower-middle income developing countries. 

Given the ARDL model results shown in Table 4.3, the coefficient for foreign exchange rate (FXR), 

which is our second major independent variable had a negative (approximately, -0.86), but significant 

(0000 < 0.05) long-run impact on GDP growth rate in Nigeria over the period of study. This result 

implies that a 1% increase in FXR resulted in approximately 86 percent decrease in GDP in Nigeria 

during the review period. Our finding was affirmed by the study of Mazenda (2024) in South Africa. 

This confirms theoretical suggestions, which propose that depreciation in the exchange rate 

discourages investment, which translates into low levels of economic growth.  

Conclusion / Recommendations 

In light of our findings, this study comes to the conclusion—contrary to theoretical assumptions— 

that FDI had no discernible impact on Nigeria's economic growth. This came when the long-term 

effects were taken into account. While crowding out domestic investment, FDI has a short-term 

positive effect on economic growth. Conversely, theoretical presumptions state that persistent 

devaluation, floatation, and fluctuation in the value of the Naira deter investment. This study suggests 

that if the government proactively addresses infrastructure issues, develops a framework of policies 

that promote efficient technology transfer and knowledge sharing, and improves the business climate 

in order to draw in investors, foreign direct investment (FDI) can greatly accelerate Nigeria's 

economic growth and have long-term positive effects. Additionally, in order to encourage more 

foreign investment and eventually propel Nigeria's intended economic growth and development, it is 

imperative that the exchange rate remain stable. 

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Volume 13 Issue 1, January-March 2025 

ISSN: 2836-9416 

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